Money Matters

MTD for Income Tax: What Making Tax Digital means for sole traders

MTD for Income Tax starts in April 2026. Learn about the requirements and rules, and discover what you have to do to get ready in time.

Making Tax Digital (MTD) is the UK government’s flagship programme to make it easier for businesses and individuals such as sole traders to get their tax right.

As you might guess from the name, it does this by legislating the digitalisation of tax data and submission.

The next legislation to come into effect will be MTD for Income Tax in April 2026.

In this article, we answer questions that you, as a sole trader, may have around this, and what it means for your business finances.

What is Making Tax Digital for Income Tax?

Making Tax Digital (MTD) is part of HMRC’s digital transformation of the tax system, and it comes into effect from April 2026 for businesses such as sole traders and landlords that have gross income over £50,000.

As of April 2027, it affects those with gross income over £30,000, and as of April 2028, it affects those with gross income over £20,000.

It will become a legal requirement for those within scope and changes how they inform HMRC about their business income and expenditure for income tax purposes. As its name suggests, the main concept is that you must digitalise your taxes.

What are the benefits of MTD for Income Tax?

As a sole trader, you’ll find that MTD for Income Tax will make it much easier to keep on top of your tax obligations.

By using MTD-compatible software, you’ll get benefits beyond simplifying basic accounting tasks.

Leading solutions give you:

• The ability to keep digital records and submit tax returns digitally, reducing human error.
• More visibility of cash flow.
• Improved awareness of your estimated tax liability throughout the year, helping you set aside the appropriate amount and avoid unexpected bills.
• Access to technologies such as artificial intelligence (AI) to automate tasks, which means less time on admin and more doing what you love.
• An understanding of your financial position and performance any time, so you can make smarter decisions faster.
• The ability to spot accounting mistakes sooner with more regular checking of data.
• Better collaboration by connecting software to your accountant’s system.
• The ability to easily capture and digitise receipts using mobile apps.

What are the latest developments around MTD for Income Tax?

HMRC is now gearing up its resources for the initial launch of MTD for Income Tax in April 2026 and it’s unlikely there will be any major changes from this point onwards.

The most recent change to its requirements came with the Spring Budget in March 2025, when the government announced the MTD for Income Tax threshold for inclusion would drop to £20,000 as of April 2028. This means anybody who’s using Self Assessment that reveals gross income of over £20,000 will need to follow the MTD for Income Tax rules.

There have been a number of delays and changes to MTD for Income Tax over the years since its announcement.

Some requirements that had previously been part of MTD for Income Tax – such as the End of Period Statements (EOPS) – have been dropped entirely. Requirements for partnerships have also been removed from the current requirements.

What is the MTD for Income Tax timeline?

MTD for Income Tax will be introduced from April 2026, for sole traders and landlords with gross income over £50,000. From April 2027, the threshold lowers to those earning over £30,000. Then from April 2028, the threshold lowers to £20,000.

In other words, and assuming you’re registered for Self Assessment as a sole trader or landlord, you will have to follow the MTD for Income Tax rules as of the following dates:

• April 2026: If you have gross income over £50,000 in the 2024/25 tax year and subsequent tax years.
• April 2027: If you have gross income over £30,000 in the 2025/26 tax year and subsequent tax years.
• April 2028: If you have gross income over £20,000 in the 2026 /27 tax year and subsequent tax years.

When does MTD for Income Tax start for sole traders?

In general terms, sole traders with gross income over £50,000 will have a start date of 6 April 2026, and those with gross income over £30,000 will start in April the following year (2027).

Those with gross income over £20,000 will start as of 6 April 2028.

The government has said it’s consulting about introducing MTD for Income Tax for gross incomes lower that £20,000 but it has not yet made any announcements.

Who will be affected by MTD for Income Tax?

MTD for Income Tax will change how millions of sole traders and landlords handle their income tax.

However, it’ll only apply those who have income above £50,000 (then later, £30,000 and £20,000) across their businesses or properties.

If your income from these sources is below the thresholds, you will continue using the existing Self Assessment system until such time as you reach the thresholds. You’ll then have to use MTD for Income Tax when HMRC tells you to, based on your existing Self Assessment tax return.

This threshold applies to gross income or turnover, not profit, and applies to the total gross income if you have more than one trade or property business.

Am I excluded from the MTD for Income Tax requirements? Or can I opt out?

It’s not possible to opt out of MTD for Income Tax if it applies to you.

However, you won’t be required to follow the MTD for Income Tax rules if any of the following apply:

• It’s not reasonably practicable for you to use digital tools to keep business records or submit quarterly returns due to age, disability, remoteness of location or any other reason (often referred to as ‘digital exclusion’).
• You are subject to an insolvency procedure.
• Your business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.

If any of the above apply, you’ll need to apply to HMRC to claim an exemption, with HMRC having 28 days to either grant or deny the application.

Other exemptions from MTD for Income Tax include these groups:

• Trusts
• Estates
• Trustees of registered pension schemes
• Non-resident companies.

Furthermore, you are automatically excluded if any of the following applies to you:

• You don’t have a National Insurance (NI) number as of 31 Januaary before the tax year begins. As soon as you get an NI number, however, you will be expected to follow the rules if they apply to you.
• Your only income is qualifying care income from your work as a foster/shared lives carer.

If either of the above applies then you should not need to apply to HMRC for exclusion.

I am already exempt from MTD for VAT. Am I exempt from MTD for Income Tax?

Yes, if HMRC has granted you exemption from the MTD for VAT requirements for reasons of digital exclusion then this should be automatically carried across to any MTD for Income Tax requirements.

What is a sole trader, and am I one of them?

If you run your own business as an individual (not through a company) and work for yourself, you are a sole trader.

If you make more than the trading allowance of £1,000 this way, you’ll need to pay taxes and National Insurance to HMRC each tax year on the gross income.

You might be a full-time sole trader, such as a tradesperson. You might be a freelancer, or even somebody who’s otherwise employed but has a side hustle that generates an income.

However, the rule is simple: if your income is above the £1,000 trading allowance then you need to register with HMRC and are considered a sole trader.

Furthermore, you must register with HMRC to use the Self Assessment tax system and file an annual Self Assessment tax return, which shows how much you’ve earned, and how much you’re claiming as allowable expenses, and what tax is therefore payable on what’s left over (that is, the profits).

Making Tax Digital for Income Tax replaces Self Assessment for any sole traders and landlords who fall within its scope.

However, there is one exception: if you’re just starting out as a sole trader or landlord, you need to register for Self Assessment first, and will not go straight to following the MTD for Income Tax rules. HMRC will subsequently write to you if you need to register for MTD for Income Tax. They will base this decision on your gross income details provided via your Self Assessment tax returns.

What is MTD ITSA?

MTD ITSA is just another name for MTD for Income Tax. In full, the acronym refers to Making Tax Digital for Income Tax Self Assessment.

MTD ITSA is an older way of referring to MTD for Income Tax, and is no longer used.

Simlarly, you may see sources referring to MTD IT, or MTD for IT. Again, this is not a widely used or an official term.

What are the MTD for Income Tax rules for self-employed sole traders?

Here’s what MTD for Income Tax requires of you.

MTD for Income Tax scope

For the first phase, the majority of self-employed sole traders whose business gross income is above £50,000 will be required to use compatible software for their income tax accounting starting on 6 April 2026.

It’s important to note that it’s the gross income that counts.

For example, if you were to make £45,000 income from your sole trader business and £6,000 from rental income on property you own, you’d need to follow the MTD for Income Tax rules as of April 2026 because your total gross income of £51,000 is above the £50,000 threshold.

Digital record keeping requirements

Eligible businesses and landlords will be required by law to keep digital records of all income and expenses using MTD-compatible software.

Those that aren’t doing this already will need to purchase or acquire a free version of software in order to comply.

Sage Accounting Individual Free is ideal for non-VAT registered sole traders with basic tax requirements, who want to simplify manual record keeping and taxes.

If you’re already using a cloud accounting software subscription there’s a good chance it will be updated in time for MTD for Income Tax, if it hasn’t already. If you’re using older desktop software then you should enquire with the software vendor about compatibility well ahead of time, and potentially allow sufficient time to switch to different software.

Quarterly updates

Under the MTD for Income Tax rules, an update for each business you own must be sent to HMRC via software every three months (or more frequently if you choose to).

In other words, you will need to send HMRC updates by 7 August, 7 November, 7 February and 7 May each for each business, as well as for property income.

If you run a sole trade business and also let a property, as an example, you will need to provide two updates every three months – one for your sole trade business, and one for your property income.

Software will take care of this for you, however, turning it into a one-click or one-tap procedure once you’ve reviewed the details. This is why it’s vital to not just get good quality accounting software but also ensure you use it regularly to manage your business income and expenses (e.g. issuing invoices via email complete with a Pay Now button, as is possible within Sage Accounting).

Quarterly updates means HMRC can provide a more up-to-date estimate of how much tax you owe.

But this will only be based on the information you provide, so won’t take into account any adjustments that you make at the year-end for assets or reliefs.

Since the updates don’t include a declaration from you, there aren’t any penalties for inaccuracy.

Yearly tax return

By 31 January following the end of the tax year, you need to use software to view the final income tax estimate calculated by HMRC, which includes details of the income, expenses and allowances you’ve told it about.

This was formerly called the Final Declaration, but that title is no longer used.

Your accountant might make corrections or adjustments at this point too.

You’ll then need to legally declare – via the tax return in the software – that you’ve provided HMRC with all the information it requested and that you agree with its income tax calculation.

This tax return brings together all information on your sole trader businesses and properties provided via the quarterly updates, as well as information on other sources of income that fall outside of MTD, such as dividends and interest.

The tax return applies to individuals, and not to individual businesses and/or property income, so you’ll only submit one each tax year.

Of course, you should also pay any outstanding tax liability by 31 January each year.

How to prepare for MTD for Income Tax with 3 simple tips

Getting prepared early will bring you the benefits of digitalising your tax sooner.

Here are three tips to help you get started:

1. Work out if MTD for Income Tax will apply to you

You’ll need to be already registered for Self Assessment for MTD to apply to you.

Whether it does or not is simple to work out: take your gross income from any sole trader business(es), plus any rental income from property you own.

If this, when combined, is above £50,000 for the 2024/25 tax year, you’ll need to register for and comply with MTD for Income Tax from April 2026.

If this gross income is below £50,000 but above £30,000 as of the 2025/26 tax year, you’ll need to comply from April 2027.

And if it’s below both £50,000 and £30,000, but above £20,000 as of the 2026/27 tax year, you’ll need to comply as of April 2028.

If you’re just starting out as a sole trader or landlord then will not go straight to MTD for Income Tax, even if you’re sure your gross income will mean you should. You should register for Self Assessment and follow its rules. HMRC will inform you if you need to register for MTD for Income Tax.

2. Look at your business admin. How much of it is compatible with MTD for Income Tax’s requirements?

For example, how much paperwork do you continue to rely upon?

Even spreadsheets might present issues when it comes to MTD for Income Tax – think deleting entries accidentally, mistyping, overwriting the contents of a cell, plus the need to be able to make those quarterly updates and final tax return.

3. Start your digitalisation process as soon as possible

To avoid admin overload, aim to be up and running with your new accounting solution well ahead of MTD for Income Tax coming into force.

Doing so will put you in the best position to firmly establish new working practices.

In addition, speak to your accountant, if you have one, to get advice and see what changes they’re planning and implementing.

If you use cloud accounting software, you almost certainly already meet the required criteria for digital record-keeping – and feature updates for quarterly updates and the digital tax return may already be present (such as with Sage Accounting).

If so, it’s possible all you’ll need to do for the 2026/27 tax year is to register for MTD for Income Tax, then activate it within your accounting software as directed by HMRC and your software vendor.

However, if you use spreadsheets, paper or a desktop accounting software package for your accounting, you’ll need to start making preparations earlier.

MTD for Income Tax: Self-employed and sole trader FAQs

Will a sole trader still be able to file paper Self Assessment returns under MTD for Income Tax?

MTD for Income Tax is entirely digital, so it is not possible to send HMRC a paper tax return.

If your income is below £20,000, MTD for Income Tax won’t apply to you and you’ll be able to continue filing your Self Assessment return in the same way as usual, following the same rules. This includes n option to send HMRC a paper Self Assessment tax return, so it’s received by 31 October each year.

Similarly, if you’re just starting out as a sole trader or landlord then you’ll need to register for Self Assessment and only register for MTD for Income Tax when HMRC writes to you to say you must. Therefore, you will be able to use a paper tax return.

Can a sole trader still handwrite or print invoices under MTD for Income Tax?

Yes, you can still create paperwork.

But the data will either have to already be in your digital accounting records (e.g. you’re printing an invoice for posting out from within your accounting software), or you should transfer the details to your digital accounting records as soon as you can.

Any relevant tax data that only exists on paper is legally required to be digitised ahead of each quarterly update.

Using a modern accounting software solution will ensure your accounting records are being kept digitally in any event, even if you or your clients/customers still have a need for paperwork.

Can a sole trader use spreadsheets for MTD for Income Tax?

MTD for Income Tax requires you to make quarterly updates and submit a tax return digitally. It’s hard to see how this can be achieved in a user-friendly way with a spreadsheet.

Spreadsheets are handy tools but they have limitations.

For example, you must keep your accounting records for at least five years, and it’s easy to accidentally delete a spreadsheet file or overwrite its contents.

If you do this with a spreadsheet containing your historic MTD for Income Tax accounting, you could be liable for a fine.

There are also issues around what HMRC calls digital linking, which is where your accounting data is digitally linked so the information is automatically transferred between systems.

As was the case with MTD for VAT, it’s expected that manually copying and pasting tax accounting data from one place to another will not be allowed and could result in a penalty.

What software does a sole trader need for MTD for Income Tax?

You’ll need to use MTD for Income Tax-compatible software to store digital records, send the required information to HMRC, view HMRC’s estimate of the final tax bill, and send a tax return.

According to TechRadar: “The best route to take for making the whole tax filing process even easier is to select a comprehensive accounting solution” – and it’s chosen Sage Accounting as the ideal choice.

Most cloud-based small business accounting software will be updated in time for MTD for Income Tax. If you use desktop software, you’ll need to ensure it’s updated in time, or investigate how to integrate it with bridging software.

You may find some older software simply won’t be updated, so you might need to change to a newer package or software provider.

Allow time for this to take place well ahead of the April 2026 implementation date.

If you use a spreadsheet for your accounting, see “Can a sole trader use spreadsheets for MTD for Income Tax?” above.

If a sole trader has already registered for MTD for VAT, do they need to register for MTD for Income Tax?

Yes. Even though both schemes require you to send information digitally to HMRC, they are still separate, requiring their own sign ups and different approaches.

Can my accountant sign my sole trader business up for MTD for Income Tax?

Yes. You should speak to them about this well ahead of time.

An accountant will be able to prepare and submit quarterly updates on your behalf, and prepare the tax return for you to sign.

Even though the accountant handles these for you, you must use software for your accounting, and keep your accounting relating to sole trader or landlord income digitally.

Can a sole trader opt-out of MTD for Income Tax?

No, MTD for Income Tax is not optional if you fall within its scope (that is, you’re a sole trader and/or landlord with an income over £50,000 in 2026, over £30,000 in 2027, or over £20,000 in 2028).

But it’s possible to apply to be digitally excluded if you have a good reason – see “Will a sole trader still be able to file paper Self Assessment returns under MTD for Income Tax?” above.

Can a sole trader deregister from MTD for Income Tax?

Yes. If a taxpayer’s turnover/gross income falls below the two thresholds, they can stop complying with requirements.

To avoid having to exit and re-join if their turnover fluctuates, the requirements only stop applying after three consecutive years of income dropping below the threshold. Taxpayers can also stop complying if their business permanently ceases.

Editor’s note: This article was first published in August 2021 and has been updated for relevance.